By Renee W. Senes, CDFA
Do you know your credit score? Have you created an online social security account? Can you easily find copies or originals of the deed to your house, the mortgage, your life insurance policies, car title, car insurance policies, tax returns for the past 5 years, brokerage and bank statements for the past year as well as year end statements for the past 5 years? If so, well done. If not, don’t worry. We can make 2016 the year in which you learn how to take control of your finances.
Managing your finances is not about knowing which stock, bond or mutual fund to buy.
It’s about knowing: what you own (assets); what you owe (liabilities); what’s coming in (income) and what’s going out (expenses). Managing your finances is about paying attention to where your money is going. Managing your finances is about being organized. Managing your finances is about knowledge.
To get started, clear off your desk or workspace. Gather all your bank statements, brokerage statements, credit card statements and everything that’s in the pile on your dining room table.
Supplies: paper, pen and pencil, 3-ring binder, 3-ring hole punch, index dividers, computer, sense of humor (possibly some cookies!).
Start by making a list of everything you own: house, car, brokerage accounts, life insurance, retirement accounts and their value. Use the internet to help (www.kbb.com, www.zillo.com) and your real estate tax bill. Then, make a list of everything you owe: mortgage, car loan, credit card debt, school loans and their outstanding balances. You may have already compiled this information while going through your divorce. Keep this information current and stored in one section of your 3-ring binder for ready access. The difference between what you own and what you owe is your Net Worth.
Next, start paying attention to where your money is going. In financial terms this is called cash flow. In real terms it’s that word we all dislike: “budget”. It’s the reality of looking in your wallet or checkbook and not having a clue as to where you spent all that money. If you are comfortable working on a computer, the easiest way to determine your cash flow is to buy a program such as Quicken or QuickBooks. Websites such as Mint.com also offer easy ways to track your expenses as does an Excel spreadsheet. If you prefer not to use the computer this can be done with pencil and paper by making columns or using graph paper. Give each expenditure a category and a sub category. For example, Utilities: phone, Utilities: cell phone, Utilities: cable
Each month enter your expenses into the different sub categories. You will get a total for each sub category (OMG – I spend that much on my cell phone!!) as well as a total for the category of Utilities as a whole. Don’t forget to enter your income as well, including income from child support and alimony. It may take you several months to get a picture of your income and expenses but it will be well worth the effort and will become the foundation of the information you need to continue managing your finances. Every month you can create a report, then after 3 months you can create a quarterly report. Put these in a section of your 3 ring binder called Cash Flow or Budget.
Once you have a handle on your cash flow, you can begin to prioritize your savings. Look for places in your cash flow/budget where you can reduce expenses or control spending. Try taking 10% off the top of your income as savings. Then, re work your expenses to see if you can still manage. If 10% is too much, try saving 8% or 5%. Utilize whatever amount of money you are able to save to:
- Get out of debt – pay down credit cards and loans
- Have an emergency fund that is not invested in the stock market. Aim for a minimum of 3 months of household expenses in savings. If possible, have an additional 3 months in a short term CD or money market account
- Take advantage of retirement plans:
- 1. If you have access to an employer sponsored plan such as a 401k, 403b or a SIMPLE that offers a matching contribution from your employer fund this1st to at least get the matching funds
- 2. Fund your IRA’s or ROTH IRA’s for 2015 – 2015 limits are $5,500 + $1,000 catch up for those over age 50. Remember, you can make 2015 contributions all the way up to April 15, 2016.
- 3. Fund your IRA’s or ROTH IRA’s for 2016 – 2016 limits are $5,500 + $1,000 catch up for those over age 50. Contributions can start as early as January 4, 2016 with an end date of April 15, 2017
Set up another section in your 3-ring binder called Savings Goals to hold these calculations and revisions.
Armed with this information, it’s time to set or review your existing financial plans and investments to see if they reflect your goals, objectives, risk tolerance and time horizon. A consultation with an investment advisor or financial planner can help you refine your goals and focus for the year ahead and the future. Take your 3-ring binder with you. Be sure to ask if what you own meets your investment objectives, how risky your portfolio is, whether you are saving sufficiently for retirement. And, don’t forget to ask your advisor how he or she gets paid!
Managing your finances and being in control of them is about knowledge. Tomorrow, take the first step toward being in control for 2016: order your credit report. As of September 2005, federal law allows you to get a free copy of your credit report once a year. You may order one from each of 3 companies: Equifax, TransUnion and Experian. You can order them all at the same time which has the advantage of being able to compare across all 3 reports. In the alternative, I think a good strategy is to request one report from a different agency every 4 months to monitor credit over the course of the year. Go to www.annualcreditreport.com.
Oh, and make sure to put these in another section of your 3-ring binder.